For young rebels, early innovation can be a path to ethical indiscretion

In light of the recent troubles of Shkreli and other scandal-ridden entrepreneurs like Travis Kalanick, the former Uber chief executive, and Parker Conrad, a founder and ousted chief executive of the multibillion-dollar human resources software firm Zenefits, the question is whether youthful rule-breaking might have foreshadowed not only their rise, but also their fall.

It is perhaps not surprising that longtime rebels like Kalanick – who has boasted of being among the first peer-to-peer file-sharing “pirates” when he was in his early 20s – would be inclined towards entrepreneurship. It is a calling that, in the often repeated narrative of economist Joseph Schumpeter, rewards those who upend the established order.

“As the brain matures, I think the energy in terms of breaking rules is focused towards ‘I can do that better’ as opposed to ‘I’m going to take a pair of sneakers’,” said Levine, who published a peer-reviewed paper on the topic with Rubinstein in a top journal this year. Both men are experts on entrepreneurship, and Rubinstein also studies human capital.

The problem is that the psychological forces that drive teenagers to break rules may not be so easily channelled later on.

Laurence Steinberg, a Temple University professor and an expert on the psychological development of adolescents, cited a phenomenon known as “moral disengagement”, in which people rationalise behaviour at odds with their own principles. A teenager who steals a pair of sneakers, for example, may tell himself that the manufacturer was overcharging consumers.

Studies have shown that such moral disengagement frequently enables wrongdoing, and that it can survive into adulthood. According to Steinberg, entrepreneurs who are prone to moral disengagement may continue to break actual rules, not just metaphorical ones.

“You think the regulations are uncalled-for,” he said. “Even though you might be breaking them, you’re really not doing a bad thing, because they were bad regulations.

“Such behaviour is often encouraged in Silicon Valley. For years, many technology investors applauded Uber’s practice of operating without the approval of local regulators, and then exploiting the company’s popularity among riders to bring about changes to the rules.

There are two factors that make it even more tempting to fudge ethical questions: the relative lack of oversight at start-ups, and the enormous risk of failure.

“Entrepreneurial businesses are often in crises, due to high levels of environmental uncertainty, the large number of actual or potential competitors, and the significant amounts of financial capital needed to compete,” said a 2015 article in The Journal of Business Ethics. “Moral disengagement can cognitively pave the way and increase the likelihood that these dilemmas will be resolved unethically.

“In effect, entrepreneurship takes people who, as a group, are prone to breaking actual rules and putting them in a setting that constantly encourages them to do so.”

Shkreli, who is to be sentenced in January for defrauding investors in two hedge funds he managed – and had his bail revoked on Wednesday after offering a bounty for a strand of Hillary Clinton’s hair – has played down his wrongdoing.

“He did it, and it worked, and they got paid,” one of his lawyers said in court, arguing that Shkreli made his hedge fund investors whole partly by using stock from his pharmaceutical company. Steinberg called it a clear example of moral disengagement. (The lawyer, Benjamin Brafman, said that Shkreli never intended to defraud anyone.)

Of course, youthful wrongdoing is hardly destiny when it comes to adult rule-breaking, as Levine, the economist, pointed out. While he was at Harvard, Facebook founder Mark Zuckerberg was summoned before an administrative board over allegations that he had hacked into university websites. But he appears to have matured over time, even retiring the “move fast and break things” motto in 2014.

These days, many venture capitalists spend as much time assessing what kind of troublemaker an entrepreneur may be as they do assessing a business’ revolutionary potential.

“We do want them to be rule-breakers,” said David Golden, who helps run the venture capital arm of Revolution, the investment firm of AOL co-founder Steve Case. “We don’t want them to be felons.”

New York Times

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